Can nominal interest rates be less than zero
Are firms more or less likely to invest when real interest rates are higher? Why?
The Phillips curve suggests there is a trade off between inflation and output. Why is this only
true in the “short run” ?
If a central bank has an interest rate rule of the form
Does this mean they only care about inflation and not the output gap? Why?
In class we motivated efficiency wages using worker turnover. Why does the productivity of
workers for a firm increase when relative wages rise? How does the productivity of workers
change when the overall employment rate of the economy change?
Show using a bond that pays a fixed coupon forever, that if interest rates increase after a
someone buys the bond, they would have been better off holding their money in cash instead.
(Hint: present value here is :
Model Analysis (Show how you got your answer!)
Show the effects of a negative productivity shock (temporary decrease) in the medium run
frictionless model. If labor supply is vertical ( epsilon = 0, no matter the wage always same
labor supply) instead of increasing in wages. Compare the differences in output, employment,
and real interest rates, which has greater effects? Do they both look like business cycles?
Show what happens if new immigration policy increases working age population in the
medium run. Does output, real wages, investment, and prices increase or decrease?
In the model with frictions (SR and Medium run without a central bank) what happens if there
is a temporary increase in government spending. Show the effects on output, employment , real
interest and price level in both the short and medium run.
Using the IS-PC-MR model show the effects of a permanent decrease in investor confidence.
What is the path from the short run to the medium run of real interest, inflation, output and
employment. What would be different if the monetary rule was flatter (weighted inflation
The president is running for an election and wants the central bank to increase output above the
full employment level. Using the IS-PC-MR model describe what happens.
Contrast the effects on output of a increase in the rate of saving of consumers in the short,
medium, and long run using the solow and SR/MR model with frictions without a central bank.
In the IS-PC-MR model, show the effects of a decrease to working age population (assume the
labor force that employment is measured against for efficiency wages decreases). Describe the
transition path of inflation and output. Is the real money supply higher or lower in the medium